China’s Net-Zero pledge & synergies with the new Global Sustainability Standards

Introduction

In September, the five most prominent standard-setting institutions for sustainability (SASB, GRI, CDSB, IIRC, CDP) jointly announced their commitment to working towards a comprehensive corporate reporting system.

On this backdrop, while the PRC has historically lagged on implementing some of the global standards on sustainability information disclosure, recently China has introduced some proactive environmental policies. The most promising is China’s Net-Zero Carbon commitment announced this September by Xi Jinping at the UN Assembly.  

Herein we consider the synergies between China’s ambitious ESG goals, including the anticipated 14th Five-Year-Plan, and the harmonized sustainability standards.

Sustainability Standard harmonization  

The Big-Five global standard-setting institutions, mentioned above, are now developing a unified corporate reporting system, created to ensure consistency for material ESG reporting, consisting of financial Information, comingled with material value creation and significant economic impact. 

This integration is referred to as a “nested ecosystem” built to integrate the strengths of different institutions in order to provide a more comprehensive disclosure standard.[1]  The goal of these organizations harmonizing has been to improve the transparency of measurement and disclosure of sustainability performance and reduce the burden on reporting organizations with a single, coherent global set of reporting standards.[2] 

Bringing all these organizations together whom collectively have many thousands of corporate issuers referencing their frameworks now has the opportunity to influence China’s burgeoning yet exceedingly impactful ESG regulatory policy regime.

China’s Sustainability Regulation Momentum

For about 20 years China has had the greatest impact on global carbon emissions, accounting for about 28% of the total.[3] Fortunately, in the last decade China has been pushing forward with proactive environmental movements. And, since the 2016 Paris Agreement there has been continued substantive commitments. 

For example, in 2019 via widely published CSRC announcements, environmental disclosures were to be mandatory by the end of 2020, while concurrently committing to unifying disclosure standards of A and H-share listed companies. Further, in June of this year, China published a “Green Bond Project Catalogue” which has completely excluded all fossil fuel related projects, including a previously included “clean-coal” allowance.   And most recently, the Shenzhen Stock Exchange (SSE) revised the Assessment Methods for Information Disclosure of Listed Companies, mentioning ESG information disclosure for the first time.[4]  According to the measures, the SSE evaluates the disclosure of listed companies' fulfillment of social responsibilities, focusing on whether they voluntarily disclose the performance of ESG and whether the report is full and complete.

This represents an important step taken by China's capital market in the supervision of ESG information disclosure. These measures, mentioned above, established the basic framework of ESG, as a prelude to the Net-Zero Carbon commitment announced by President Xi at the UN Assembly.

China’s Sustainability Outlook

"China's announcement to strive for carbon-neutrality within the next four decades is an unprecedented move," said Shuo Li, a climate and energy policy adviser for Greenpeace East Asia. "To achieve the vision would imply massive re-arrangement of the Chinese economy."[5]   That said, while China remains the world’s largest emitter of fossil fuels, progress has already been achieved. For example, according to the Foreign Ministry Deputy Director, Wenbin Wang, “carbon dioxide emissions as a unit of GDP have fallen nearly 50% since 2005, and that non-fossil fuel energy now makes up 15% of what the country uses — exceeding its targets for 2020”.[6]

While the soon to be released 14th 5-year-plan (FYP)[7] will be the detailed account of China’s next steps on how they will achieve it, the early indicators demonstrate that they are poised for a massive stride toward electronic transportation and nuclear power to alleviate the majority utilization of coal, natural gas and petroleum.

Noteworthy is that China’s climate department was moved from the National Development and Reform Commission (NDRC) to the Ministry of Ecology and Environment (MEE). A 2019 government initiative, expected to accelerate climate policy momentum by removing bureaucracy. And, the MEE has commissioned a number of projects in preparation for the FYP. Most important is the global benchmarking carbon measurement and best practices on setting targets.[8] For example, a NPCSC[9] leader suggested “replacing the energy consumption cap with a carbon emissions cap” when referring to the FYP,[10] stating this method as the favorable “means the start of a new process to reduce carbon emissions in absolute terms”.

Most compelling however is the MEE’s most recent announcement,[11] citing 2022 and 2025 as targets for “climate investment standards to be advanced”, “foreign cooperation to be deepened” and specifically calling for “construction of an internationally influential climate investment and financing cooperation platform”. In those time frames, they also cite, “promoting third-party certification of climate projects and related financial products” including calling on “credit rating agencies to factor in ESG”. Lastly, they call for standardized climate related disclosure mandates, including specific “statistical indicators and a monitoring platform that is centrally managed”.[12]

Conclusion

The above, while naming a number of specific types of improvements, falls short in technical specifics. While it well recognized that China has some strong pledges and goals in place, what is missing is short-term measurable thresholds. Accordingly, we see the FYP14 as a key document which is expected to also indicate some level of global ESG alignment in an effort to hold its polluters accountable. 

While not named specifically, one can logically deduce that the MEE may endeavor to reference generally accepted ESG standards, while assisting in promulgating China’s own targets and measurements.   Accordingly, considering the world now has a more persuasive unified global reporting standard along with technical benchmarks from the EU Taxonomy, published in March of this year, near-term progress in China is expected. 

And, the continued momentum will be further compounded by market forces such as China focused institutional investors, the UN supported Principles of Responsible Investment and related subject matter advisories. That said, the more probable manifestation will be a China specific sustainability framework, which may incorporate a number of the global elements, while firmly exemplifying its own Chinese characteristics.

[1] “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting” at p. 7, September 11, 2020

[2] “Statement of intent to work together towards comprehensive corporate reporting”, Impact Management Project, September 11, 2020.

[3] “Progress of Air Pollution Control in China and Its Challenges and Opportunities in the Ecological Civilization Era”, Elsevier, 19 June 2020

[4] See SSE - September 2020 circular: https://www.szse.cn/disclosure/notice/general/t20200904_581281.html

[5] “China needs an economic revolution to deliver Xi's ambitious climate agenda” October 7, 2020, Laura He, CNN Business

[6] Ibid

[7] To be approved by China’s top legislature in early 2021

[8] https://www.caep.org.cn/yclm/dwwtxmgl/zlghb_21985/201904/t20190430_701675.shtml

[9] “Standing Committee of the National People's Congress (NPCSC)” is the top legislative body of the PRC

[10] Wang Yi, a member of the Standing Committee of the National People’s Congress and a key climate and sustainability advisor to the government stated at this year’s National People’s Congress session. “The 14th Five Year Plan: what ideas are on the table?” T. Baxter and Yao Zhe, August 7, 2019

[11] October 21st, Guiding Opinions on Promoting Investment and Financing to Address Climate Change”, General Office of the Ministry of Ecology and Environment

[12] Ibid